Friday Reflection | September 11, 2020
An Orange Sky, and a Green Future
The skies above the Bay Area turned an ominous shade of orange this week, blanketing us in an unnatural darkness for most of Wednesday. This unsettling consequence from the multitude of fires burning in the western United States was minor compared to the displacement of residence. In Oregon, more than 500,000 residents — over ten percent of the state’s population — have already evacuated their homes.1 Unsafe air quality forced Bay Area residents indoors, furthering the sense of anxious isolation that has built up over recent months. This is combined with today’s remembrance of the many lives that were lost or altered following the 9/11 tragedy nineteen years ago. The financial world shared a sense of trepidation about the state of the world, with the stock market continuing volatile swings from last week en route to finishing the week -2.5% lower.
Risk, Beyond the Market
Risk is a familiar refrain in conversations with clients. In investment parlance, this usually refers to volatility and related decisions about the appropriate balance of stocks and bonds in a portfolio. Going a layer deeper, we may talk about the risk/return characteristics of small cap stocks and emerging markets, or how a particular fund or sector has weathered past market corrections. These technical considerations are important when constructing a resilient portfolio based on historical data and economic forecasts. It is important to remember, however, that the temporary decline of invested capital is not the only risk we are evaluating with clients.
The purpose of an investment portfolio is to steward a pool of resources that outpaces inflation and supports you and your family through both the predictable and unpredictable future events. This often includes planning for the transition to retirement or building up college savings to cover tuition for your child’s university costs. It also means planning for the unexpected – when fire season destroys your house or that of a loved one, when illness surfaces suddenly, or a pandemic dries up your ability to earn money at the same level as prior years. In these times, the resiliency of a portfolio and the security of your savings, become more valuable than chasing an extra bit of growth in an irrational market rally.
These non-market risks, which exist in our personal lives and our wider communities, are important to integrate with the more traditional risk factors. They support determining an appropriate allocation to growth and caution in your financial life. Finding the right balance means that your financial landscape doesn’t compound stressful moments, but instead provides a sense of security in an uncertain world.
Some threats span the range of market risk and non-market risk. The current pandemic presents obvious health and mental health risks, as well as dramatic impact to small businesses and unemployment that directly affect investment decisions. The changing climate globally is a similar risk that spans both personal comfort and safety as well as presenting enormous economic implications. This year alone began with historic wildfires in Australia, a double hurricane in the southeast United States, and the current fires in California, Oregon, Washington, and Colorado. Global temperatures over the past five years represent the five hottest years since record keeping began in 1880.2 The trend line appears clear, the world is warming, and businesses and communities globally will need to adapt to the catastrophic impacts of this transformation.
In the US, we still rely on non-renewable energy sources for 89% of our power generation.3 Oil, coal, and natural gas dominate this energy mixture and contribute substantial emissions that exacerbate the rate of climate change. Despite political arguments, this direct link is universally understood by the scientific and business communities. Renewable energy generation in the US has grown by 40% since 2010.4 Change is already underway. The challenge is accelerating and scaling that change.
We see renewable energy production as a major area of economic growth in the coming decades. This is true regardless of the outcome in November, although stark policy differences will impact the rate of industrial efforts to adopt more renewable power generation. Last November, Pew Research Center found that 77% of Americans view development of alternative energy sources such as wind power, solar power, and hydrogen technology as a higher priority than increasing US production of fossil fuels.5 The orange sky and recurring wildfires serve as a visceral reminder of the importance of supporting clean energy and green technology, for both policymakers and investors.
There are small signs that policymakers are attempting to find common ground on this shared risk. This week, enough Senate Republicans joined Democrats and a coalition of business and environmental groups to create change around hydrofluorocarbons (or HFCs). HFCs are used to cool everything from refrigerators to cars and are thousands of times more potent than carbon dioxide as a driver of climate change. These groups have been pushing the Trump administration for months to support the 2016 Kigali Amendment, along with nearly 200 countries, to phase out the use of these contributors to global warming.6
Investing in Resiliency
The path ahead involves complex management of pacing, decommissioning old technologies and infrastructure, ramping up the production and adoption of cleaner technologies, and helping cities and workforces digest this transformation. Time is critical, and the scale is global. This inherently means enormous growth will be needed in companies and industries that support these efforts. Whether that is production of new air conditioners for US households, expansion of electrified vehicles globally, or increasing the percentage of our energy generation from wind, solar, and other renewable sources. Many of these trends represent investment opportunities, improving resiliency in portfolios as well as being critical steps for protecting our shared climate.
Improving resiliency in our clients’ financial lives is the intended outcome when we talk about ‘risk management’ just as improving resiliency in our economy and our energy usage is key to the stability of our communities. Life is dynamic, and we believe the future will bring a good deal of innovation we can’t yet fully envision. That innovation will be part of our clients’ portfolios as well, and in turn, support their personal trajectories and stewardship of their families, communities, and environment.
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.